"Ohio Decision Marks Victory for Oil and Gas Producers"

Litigation Alert
April 22, 2014

Bowles Rice is pleased to announce a recent Ohio decision in which landowners were trying to challenge old leases and, specifically in this case, test the implied covenant to reasonably develop the strata below those formations currently producing.  The Court held in favor of the leasehold owners, who owned the "deep rights" and were represented by Bowles Rice lawyers Robert Bays and Bret McNab.

Summary:

In an action seeking declaratory judgment as to the leasehold rights for those formations below the Germantown Sand Formation (the "deep rights"), an Ohio court ruled that there was no breach of the implied covenant to reasonably develop or abandonment of the "deep rights" when production is found in "paying quantities" on those formations located above the Germantown Sand Formation (the "shallow rights").

The issue raised before the Court of Common Pleas in Washington County, Ohio, was whether shallow well production was sufficient to meet the implied covenant to reasonably develop by the leasehold owner of those "deep rights," where the secondary term of the leases was for "as much longer as oil or gas is found in paying quantities thereon."  Plaintiffs Gary D. Marshall et al. claimed that they were entitled to forfeiture of the "deep rights" for failure to develop or by abandonment.

Specifically, Plaintiffs own real property in Liberty Township, Washington County, Ohio, totaling 99 acres. The tracts are subject to two oil and gas leases, dated 1901 and 1903, currently held by the production of 15 wells in "paying quantities" by Sandbar Oil & Gas Company from the surface to the bottom of the Germantown Sand (approximately 1200 feet).

Judge Randall G. Burnworth granted summary judgment to Defendant Baron Kidd and heirs, ruling "none of the parties in the early 1900s could have foreseen the current development of shale.  The reservation of the 'deep rights' by the assignors in the 1960s was indeed fortuitous to the heirs. Until the Ohio Supreme Court rules otherwise, parties in this situation will be bound by the terms of agreements made by their predecessors."

"The Court finds that reasonable minds could come to but one conclusion and that is that the original leases are still valid and in full force and effect as to all depths and all formations," Burnworth said.

The ruling marks a significant victory for oil and gas producers against landowners seeking to terminate those portions of oil and gas leases covering the "deep rights" because of an alleged breach of the implied covenant to reasonably develop or abandonment of the "deep rights" when only "shallow rights" are currently being produced.

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